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History and the Hill: Tax Bill Extends the 26 Percent GO Zone HTC

Published by John Leith-Tetrault on Saturday, January 1, 2011

Journal cover January 2011   Download PDF

When the fifth anniversary of Hurricane Katrina was observed this past August, media coverage focused as it always does on New Orleans, pointing to both the positive recovery work that has been done and the difficult challenges that still remain.  As one veteran preservationist who rode out the storm in her Lower Garden District home said, “The rebirth of New Orleans is going to be a marathon, not a sprint.”

Thankfully, citizen efforts to bring back what is arguably America’s most historic city received a boost in the bipartisan tax package that passed in the lame duck session of the 111th Congress.  Lost among higher profile provisions such as renewal of the Bush tax cuts and revised rates for the estate tax was a provision to extend the 26 percent Gulf Opportunity (GO) Zone federal historic tax credit (HTC) through December 31, 2011. The special 6 percent boost in the 20 percent HTC was originally enacted in 2005 at the urging of the National Trust for Historic Preservation, which called Hurricane Katrina’s impact on the Crescent City “the greatest cultural disaster in American history.”

Two previous one-year extensions were granted for 2008 and 2009. Sen. Mary Landrieu deserves great credit for her steadfast support for the use of the 26 percent federal HTC as a driver of economic recovery efforts.  Sen. Landrieu said, “New Orleans architecture reminds us of our heritage and forms the foundation in our vibrant culture.  People who visit New Orleans from across America—and the world—are awed by the diverse mix of architectural styles found only here.  The historic tax credit provides the resources and catalyst to preserve our historic architecture and to fortify our dynamic culture. To build the city of the future, we must first preserve our past.”

According to the National Park Service, 143 properties in New Orleans  and Baton Rouge, with total development costs of $460,765,715, had been awarded 26 percent HTC GO Zone Credits from 2006 through the third quarter of 2010. Many of these New Orleans projects have made significant contributions to the recovery of city’s tourism business, most notably the rehabilitation of the former Maison Blanche hotel into the 527-room Ritz Carlton in the French Quarter. Other high profile historic rehabilitations that have been financed with the GO Zone HTC have included the Mercantile Building, developed by Wisznia and Associates into mixed-use office, retail and market rate housing, and the conversion of the Pontchartrain Hotel into senior apartments by the Burris Group. Notable Baton Rouge projects include the 93-room boutique King Hotel and the Kress Building, developed by Cyntreniks Group LLC.

Relief for Properties Under Construction or In the Planning Stages
The loudest cheers for the extension of post-Katrina GO Zone historic preservation incentives came from property owners and investors who rolled the dice and closed on historic rehabilitation projects that needed the 6 percent HTC credit boost when extension was anything but assured.  Many of those developers, who began construction in 2010 with an expected placed in service date of 2011, had to estimate how much of their qualified rehab expenditures would occur under the 26 percent credit in 2010 and the 20 percent credit in 2011. Now those projects will be able to earn the 26 percent credit for all of their eligible expenditures.

So how will the extra subsidy be spent? Pres Kabacoff of Historic Restoration Inc., the developer behind the Healing Center (Universal Furniture Store) rehabilitation on St. Claude Street said, “The extension of the 26 percent GO Zone rehab credit was something we had needed desperately for the financing of the Healing Center in New Orleans. Even though the extension was introduced in 2009, due to pressure to close the deal, we had to take a risk in our financing structure by closing prior to the passage of the bill. With the passage of the measure, sources will now equal uses without the need to scale back the scope of this important community center.”

Developer D. Mark Wyant, of Dallas-based Seabrook Lodging, is working on the conversion of the Audubon Building into the 168-room Indigo Hotel adjacent to the Ritz Carlton on Canal Street.  With a completion date of late 2011, all of the Audubon’s QREs will now earn the 26 percent credit. Opening a hotel during this deepest of recessions has proved to be a challenge for many historic hotels that have been placed in service in the last 18 months. The most notable example has been Kimpton’s Monaco Hotel in Baltimore, which opened a year ago and is already in foreclosure.  With the economic recovery proceeding at a snail’s pace, the Audubon will undoubtedly benefit from the added cushion of the GO Zone HTC extension.  

Saenger Theater Reopening May be the Most Significant Outcome
Perhaps the biggest beneficiary of this tax package provision will be the effort to reopen the Saenger Theater, New Orleans Broadway Show venue. The theater has been closed since Katrina hit and its basement was flooded and its roof damaged. The owners of the Saenger, Ace Entertainment, have struggled to develop a feasible rehabilitation plan over the past five years.  The ornate, 4,000-seat theater was designed by architect Emile Weil and built in 1927.  

The owners were under way on a $5 million restoration when the storm hit and much of the value of that work was lost. I toured the Saenger about three months after the storm and, standing in the balcony, I witnessed the eerie effect of “rain” on the stage caused by the roof damage. With the displacement of tens of thousands of New Orleans Parish residents to cities like Baton Rouge and Jackson, Miss., the theater’s operators were not sure whether they still had an audience.  Plans to begin rebuilding shortly after Katrina were thwarted, along with the plans of many other property owners, when it was learned that capital improvement financed by insurance proceeds could not be used as the basis for a tax credit transaction. (Hopefully, in future natural disasters, relief from this bizarre feature of the Internal Revenue Code will be a standard feature in any recovery legislation.)

The Saenger rehabilitation plan that is moving toward closing features a donation of this storied venue to the city of New Orleans and a leaseback to Ace Entertainment with an operating deficit guaranty by Ace, a for profit arts promotion group based in Houston. Financing includes new markets tax credit financing from three participating community development entities (CDEs), the National Trust Community Investment Corporation, Stonehenge Capital and Liberty Bank. The city of New Orleans is contributing soft debt financing and the state of Louisiana is providing “Broadway South” tax credits and state historic tax credits. Ace is currently negotiating with a corporate investor for the sale of the federal 26 percent tax credit.

Prior to the passage of the extenders bill, the Saenger was struggling to close a financing gap based on the previous December 31, 2010 sunset date of the GO Zone HTC.  Now most of the qualified rehab expenditures will earn the higher federal credit, providing the additional financing to close the gap.  Ace Entertainment has a goal of opening in the spring of 2012 with a showing of the Broadway hit, the Lion King. Discussing the significance of the Saenger’s planned restoration, Kurt Weigle of the Downtown Development District said, “The Saenger is the crown jewel of New Orleans’ performing arts venues and its rebirth is critical to Canal Street’s full recovery from the effects of Hurricane Katrina. We are working very hard to revitalize the city’s historic theater district and we know the extension of the 26 percent HTC will be critical to the Saenger as well as other important historic properties in downtown.”

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